Japan FSA: Global Regulators To Draft Insurer Rules By Jan
June 30 2009 - 6:41AM
Dow Jones News
Global insurance industry regulators plan to come up with a
basic outline of common rules on solvency requirements for
international insurers by January, according to a report seen on
the Web site of Japan's financial watchdog Tuesday.
The drafting of such rules would be a step toward creating a
crisis-prevention framework to pre-empt a global industry meltdown
like the one that nearly brought down U.S. insurance giant American
International Group Inc. (AIG) in 2008.
According to the report on the Web site of the Financial
Services Agency, the International Association of Insurance
Supervisors agreed at a meeting in Taiwan last week to draft a
rough outline of universal solvency margin requirements and other
rules for major insurers by January, when the association's
executive is scheduled to meet.
The FSA's insurance supervisors are members of the IAIS, which
represents regulators from around 140 countries.
People familiar with the matter told Dow Jones Newswires the
January deadline is much more ambitious than an initial timeframe
of 15 to 20 months from June.
Moving the schedule up underscores a determination to bring
insurers that operate internationally, such as AIG, Prudential PLC
(PUK) and MetLife Inc. (MET), under global oversight to pre-empt
further crises, the people said.
The IAIS doesn't want to let international momentum to tighten
checks on major insurers "fade away by unnecessarily extending the
discussion period," one of the people said.
The solvency margin ratio is a key gauge of how much capital an
insurer has, measured against risks. The higher the ratio, the
better-equipped a firm is if faced with unexpected investment
losses or a surge in claims.
According to the FSA report, a central element of the IAIS rules
would be that the solvency ratio requirements be applied to all of
an insurer's group companies - including non-insurance businesses -
rather than just the insurer itself.
The crisis that nearly wrecked AIG last year stemmed from huge
losses by a U.K. subsidiary that had guaranteed high-risk
investments, which later turned sour.
Neither the unit nor AIG as a group had sufficient buffers to
manage the crisis, partly because U.S. regulations lacked
group-wide capital requirements.
The IAIS is unlikely to propose any specific ratios in January.
That could take a couple of years, the people said.
But the "basic thinking" over how regulators should calculate
ratios should be determined by then. That would provide hints on
how high the ratios will be.
In the coming months, the IAIS will also mull rules over
investment, governance, risk-management and auditing by insurers,
the FSA report showed.
The IAIS will consider other sensitive issues, such as whether
to allow governments to ban insurers from moving capital across the
globe - something they may wish to do to protect policyholders when
a crisis hits global insurers, according to the report.
Another topic will be how much influence regulators should have
over foreign insurers.
To be sure, the AIG debacle has led the U.S. government to
include plans to oversee all insurer group companies, including
non-insurance units operating overseas, in recent proposals for
domestic regulatory reform. Europe is also moving toward its own
oversight regime, called Solvency II.
But global regulators still think universal rules are needed.
That is partly because, while solvency requirements exist in
advanced economies, such rules vary by country, making it hard to
effectively oversee big insurers.
The IAIS move toward universal rules is in line with a mandate
from the leaders of the G20 countries last November, which was
triggered by the U.S. federal bailout of AIG that now tops $180
billion.
But the IAIS project could take years to finalize, given that
governments must iron out their competing interests, as well as
carry out feasibility studies.
U.S. state regulators, which supervise insurers in the absence
of a federal regulator, have been reluctant to act quickly. But
Asian nations, like Japan and China, seem eager to move ahead, the
people said.
-By Takashi Nakamichi, Dow Jones Newswires; 813-6895-7558;
takashi.nakamichi@dowjones.com